No-one wants to think about dying, but planning ahead can dramatically reduce the amount of Inheritance Tax (IHT) when the time comes.
IHT is a universally hated tax in the UK. After all, you’ve worked hard all your life so why should HRMC take a big bite out of your estate when you die?
But until there’s a change in the rules, we’ve all got to suck it up.
Whether it’s your cash, your home or your cryptocurrency, it has to be included in your Inheritance Tax calculations.
However, there are things you can do while you’re still alive which are perfectly legal to cut down on any future IHT liability.
Many people approach a financial adviser to see if they can reduce their Inheritance Tax bill, or avoid it altogether.
The good news is there’s a lot that can be done with your assets – including your crypto – while you’re still alive to reduce the amount that goes to the state.
According to HMRC cryptocurrencies, such as Bitcoin, Ethereum or Litecoin, meet the criteria for two areas of IHT reduction – lifetime gifts and potentially exempt transfers which are covered later on.
So if your portfolio includes Bitcoin and you’re looking for ways to cut your Inheritance Tax liability then read on.
For reference, the 2021-22 IHT allowances are:
- A £325,000 nil-rate band, meaning that part of your estate is tax free.
- An additional allowance of £175,000 if you’re leaving a property to a family member.
- Anything above these amounts is taxed at 40%.
What can I do to reduce or avoid my Inheritance Tax bill?
There are a number of ways to limit your IHT liability and pass on more of your assets to your loved ones, but to reiterate, it’s important to plan ahead while you’re still fit and healthy.
The sooner you take action, the more of your estate will be taken out of the hands of the Government and secured for your family.
Put simply, the more time you give yourself, the more you can do.
The main ways to reduce IHT are:
- Annual exemptions
- Potentially Exempt Transfers (PETs)
- Regular gifts out of income
- Putting money into Trust
- Charitable Giving
- Business Relief
What are my annual Inheritance Tax exemptions and how do I use them?
You’re given certain annual allowances by HMRC each year. These are sums of money or other assets that you can give away tax free.
As soon as they leave your hands they are immediately out of your estate and exempt from any future Inheritance Tax liability.
So what are your annual exemptions?
Each year you’re allowed to make gifts of up to £3,000, including anything of value such as cash, cryptocurrencies or other possessions. This is known as your annual exemption.
In addition to this, you can give an unlimited number of small gifts of up to £250 per person (but only one per individual per year).
Other additional gifts are allowed for special occasions as long as the recipient hasn’t received a small gift in the same tax year.
Additional special occasion gifts include:
- £5,000 per child for their wedding or civil ceremony.
- £2,500 per grandchild or great-grandchild, again for a wedding or civil ceremony.
- £1,000 per person (friend, colleague etc) on their wedding/civil ceremony day.
You can also make gifts to registered charities or political organisations during your lifetime and they will be tax free in the eyes of HMRC.
What are Potentially Exempt Transfers (PETs) and how do I they work?
Feeling fit and healthy? Reckon you’ve got at least another seven years left of life in you?
Great! Give away as much cash, cryptocurrency or other assets as you like to anyone you choose and it’ll be tax free… if you make it!
These gifts are known as a Potentially Exempt Transfers and are subject to the seven-year rule and taper relief.
If you survive for less than three years after you make the gift, the full amount of IHT will be payable.
But for each subsequent year you survive you’ll knock a percentage off – called taper relief – until it reaches zero after the seventh year.
If you want to make a PET but are worried about leaving someone with a big tax bill if you die within seven years, you can take out insurance to cover your beneficiaries against any future liability.
What are regular gifts out of income and how do I make them?
If you’re lucky enough to have a decent chunk of cash left over from your earnings each month (whether from employment or investments) then you can give it away, tax free.
HMRC states that you must be able to maintain your standard of living after the gift and that clear records of what you’ve given and to whom are kept.
But apart from that you can gift your spare cash to others and ultimately your estate will benefit as there will be no tax liability to pay.
Cash gifted in this way is removed from your estate and can be a good way to drip feed an inheritance to someone without the tax burden.
Can putting assets into Trust help reduce my IHT bill?
Financial advisers often recommend trusts as way of ‘bloodline planning’ or preserving assets for future generations of your family.
They’re extremely useful when it comes to protecting assets and stopping them falling into the wrong hands, for example, through remarriage.
They’re also handy when it comes to reducing your IHT liability as you can place certain assets – including your cryptocurrency – into a Trust and potentially benefit from tax relief, depending on the specific arrangement.
There are several different types of Trust, such as a bare trust, an interest in possession trust, discretionary trust and mixed trust.
In most cases, when you put money or an asset such as Bitcoin into a trust you no longer own it, meaning it doesn’t count towards any future IHT liability.
Choosing the right trust and securing the maximum tax benefits can be quite complication and it’s best to engage a financial professional to arrange this for you.
Can I give Bitcoin to charity to reduce Inheritance Tax?
Yes. You can do this when you’re alive and dead.
An increasing number of charities are starting to accept Bitcoin donations. The RNLI and Save The Children, for example, both accept crypto.
Any Bitcoin you give to charity while alive is free from tax and out of your estate for IHT purposes.
The same applies if you leave crypto (or any other asset) to charity in your will. If you donate more than 10% of your net estate to charity your Inheritance Tax liability will fall from 40% to 36% on all your remaining assets.
For some people this can eliminate their liability altogether, and it’s also a great way of giving back to society when you die.
Avoid Inheritance Tax by using Business Relief
This doesn’t directly apply to owning crypto, but we’re including it here to ensure this article covers all areas of reducing IHT.
BR (often referred to as Business Property Relief) relates to tax savings on the transfer of business assets.
However, even if you’re not a business owner, you can use BR to reduce your Inheritance Tax liability.
The way it works is that you invest in a qualifying business and hold the investment for a minimum of two years.
After this, the asset is free from any future Inheritance Tax liability. As such this method is often used as part of an estate planning strategy.
Again, the rules and tax treatment are complicated so if you’re considering BR as an IHT mitigation route you’d be wise to consult a financial expert.
Many people are unaware of the exemptions that are available to them and fail to give themselves enough time to fully take advantage of them.
But for most of us who have fairly simple estates, much of what can be done to reduce Inheritance Tax is straightforward and does not require any outside assistance.
It’s also vitally important that you make a Will and include details of your cryptocurrency in a separate letter of wishes.
Thinking ahead will enable you to keep much more of your estate within your family so that future generations can benefit from your hard work.
Adam is the founder of The Crypto Adviser which offers experts guides and reviews on all things related to Bitcoin and cryptocurrency.
Adam is Diploma for Financial Advisers (DipFA) Level 4 qualified, a Member of the London Institute of Banking and Finance (MLIBF), and has worked for many years as a journalist and PR consultant, having studied with the National Council for the Training of Journalists (NCTJ).